budget preparation management control systems chapter 9 august 2014iwan pudjanegara se., mm.1
TRANSCRIPT
Budget Preparation
Management Control Systems
Chapter 9
August 2014 Iwan Pudjanegara SE., MM. 1
Nature of a Budget
An Operating Budget usually covers one year and states the revenues and expenses planned for that year.
Budget is prepared in more detail then the strategic plan and its preparation involves managers at all levels in the organization.
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Nature of a Budget(Budget Characteristics)
• A budget estimates the profit potential of the business unit.
• It is stated in monetery terms.• It generally covers a period of one year.• It is a management commitment.• The budget proporsal is reviewed and
approved by an authority higher than the budgetee. (budgetee=the manager who prepares budget)
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Nature of a Budget(Budget Characteristics)
• Once approved, the budget can be changed only under specified conditions.
• Periodically, actual financial performance is compared to budget, and variances are analyzed and explained.
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Nature of a Budget
The process of preparing a budget should be distinguished (=dibedakan) from:
a) Strategic Planning
b) Forecasting
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Budget Preparation vs Strategic Planning
Budget Preparation• Focuses on a single yr.• A one-yr slice of the
organization’s strategic planning.
• Structured by responsibility centers.
Strategic Planning• Focuses on activities
that extend over a period of several years.
• Precedes budgeting and provides the framework within which the annual budget is developed.
• Structured by product lines or other programs.
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Budget Preparation vs Forecasting
Budget Preparation• Is a management plan.• Stated in monetery term• Covers a period of one
year.• It is both a planning tool
and a control tool.• All budgets include
elements of forecasting.
Forecasting• Is a prediction of what
will most likely happen.• May or may not be
stated in monetery terms• It can be for any time
period.• It is planning tool.
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Budget Preparation vs Forecasting
Budget Preparation• Managers agree to
accept responsibility for attaining the budgeted objectives.
• The budget proporsal is reviewed and approved by an authority higher than budgetee.
Forecasting • The forecaster does not
accept responsibility for meeting the forecasted results.
• Forecasts are not usually approved by higher authority.
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Budget Preparation vs Forecasting
Budget Preparation• Once approved, the
budget can be changed only under specified conditions.
• Periodically, actual finance performance is compared to budget, and variances are analyzed and explained.
Forecasting• A forecast is updated as
soon as new information indicates there is a change in conditions.
• Variances from forecast are not analyzed formally or periodically.
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Forecasting Characteristics
• A forecast may or may not be stated in monetery terms.
• It can be for any time period.• The forecaster does not accept
responsibility for meeting the forecasted results.
• Forecasts are not usually approved by higher authority.
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Forecasting Characteristics
• A forecastis updated as soon as new information indicates there is a change in conditions.
• Variances from forecast are not analyzed formally or periodically.
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Use of a Budget(Principal Purpose of Budget)
1. Fine-Tuning the Strategic Plan
2. Coordination
3. Assigning Responsibility
4. Basis for Performance Evaluation
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Operating Budget Categories
Revenue Budgets Budgeted Production Cost & Cost of Sales Marketing Expenses Logistic Expenses General and Administrative Expenses Research and Development Expenses Income Taxes
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Other Budgets
Capital BudgetBudgeted Balance SheetBudgeted Cash Flow StatementManagement by Objectives
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Budget Preparation Process
OrganizationoBudget DepartmentoThe Budget Committee
Issuance of Guidelines Initial Budget ProposaloChanges in External ForcesoChanges in Internal Policies&Practices
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Budget Preparation Process
NegotiationSlack: the difference between the budget amount
and the best estimate.
Review and Approval Budget Revisions there are two types:
Procedures that provide for a systematic updating of the budgets.
Procedures that allow revisions under special circumstances.
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Budget Preparation Process
Contingency BudgetsIdentify management actions to be
taken if there is significant decrease in the sales volume from what was anticipated at the time of developing the budget.
Provides a way of quickly adjusting to changed conditions if the situation arise
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Budget Preparation Process
Participation in the Budgetary ProcessTop-down budgeting: senior
management sets the budget for the lower levels.
Bottom-up budgeting: lower-level managers participate in setting the budget amounts.
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Budget Preparation Process
Two Reasons why Budget Participation has positive effects on managerial motivation :Leads to higher personal commitment to achieve goals.
Participating budgeting results in effective information exchanges.
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Budget Preparation Process
Degree of Budget Target DifficultyThe ideal budget is challenging but
attainable.
Senior Management InvolvementMotivating budgetees
The Budget DepartmentAnalyze the budgets in detail, prepared
properly, and accurate information.August 2014 Iwan Pudjanegara SE., MM. 21
Quantitative Techniques
SimulationSimulation is a method that constructs
a model of a real situation and then manipulates this model in such a way as to draw some conclusions about the real situation.
The preparation and review of a budget is a simulation process.
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Quantitative Techniques
Probability EstimatesEach number in a budget is a point
estimate.Ex. Sales Estimates are stated in terms
of the specific number of units of each type of product to be sold.
Monte Carlo process
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